Initial Claims for Unemployment Insurance fell by 14,000 in the last week to 442,000. That brought the four-week moving average (generally a better measure due to the volatility in the weekly numbers) down by 11,000 to 453,750.

Initial jobless claims peaked just around a year ago, when they were at 642,000, and fell sharply until the end of 2009 (see graph below from http://www.calculatedriskblog.com/). The rebound in initial jobless claims during January and February raised the possibility that this recovery could be starting to follow the path of the recoveries following the 1991 and 2001 downturns.

In those cases, after an initial decline, new jobless claims remained at an elevated level for a few years. Those periods were “jobless recoveries.” However, initial jobless claims have now been down in three of the last four weeks, and while the four-week average has not yet gone below its year-end low, it is clearly headed back in that direction.  This is very good news.

Continuing Claims

We also got some good news on the continuing jobless claims front, which fell by 54,000 to 4.648 million and are almost a million lower than the year-ago level of 5.624 million. However, that counts only regular state-paid claims, which generally run out after 26 weeks. After that, people move to extended benefits, which are paid by the Federal government, largely from ARRA (Stimulus Act) funds.

In February, more than 40% of all the unemployed had been out of work for more than 26 weeks, so extended jobless claims are a very important part of the overall picture. Looking at just the regular state-based claims would be highly misleading.

Extended Claims

Fortunately, we also got some good news on the extended jobless claims front, or at least apparent good news. Extended jobless claims fell by 346,000 to 5.698 million (notice that the extended claims total is much higher than the regular continuing claims). However, extended claims are still more than twice the year-ago level of 2.110 million.

Perhaps the best way to look at it is the total number of people who are getting unemployment checks is now 10.346 million, down 400,000 from last week (technically not right since the extended claims data is a week behind the continuing claims data, which is in turn a week behind the initial claims data) but up 33.6% from the year-ago level of 7.744 million.

Why did I say “apparent” good news? Because even the extended claims do not last forever. Some of the drop in the extended jobless claims this week could have been from the temporary hold up in the Senate on a reauthorization of the program a few weeks ago, but most of that effect should have shown up last week, not this week (though I certainly would not rule it out). If extended jobless claims spike back up next week, then we will know that it was the “Bunning Effect,” not because those people actually found jobs.

Extended Benefits: Pros

While extended benefits are far from an optimal solution, they have been an important part of the overall stimulus. The people who get the benefits tend to go out and spend it quickly on real necessities.

Most of those who lost their jobs in this downturn had very little in the way of savings, especially savings outside of 401-k or IRA plans, going into the recession. By the time they get to the 26-week mark, they have probably already depleted those savings and run up their credit card bills.

If the checks stopped after 26 weeks (remember, half of all the unemployed have been out of work for 19.4 weeks or more), they would be left with no income or other financial resources. They would not be able to pay their electric bill, or their mortgage, or go to Kroger’s (KR) or Wal-Mart (WMT) to even buy food.

By being able to continue to spend, they keep the workers at Kroger’s and Wal-Mart employed. It means that there are fewer foreclosures than there otherwise might have been, which obviously benefits firms up and down the mortgage chain, from Bank of America (BAC) to Fannie Mae (FNM). In fact, the non-partisan CBO (Congressional Budget Office) scores extend benefits as among the most effective was to spend stimulus money on a dollar spent per job saved or created basis. Extended benefits are not just good in a humanitarian sense, they are also good economics.

Extended Benefits: Cons

There is a danger, however, that if benefits are extended too far they simply become welfare by another name. They are not a real substitute for putting people back to work. People’s skills deteriorate as they are out of work, regardless if they are getting unemployment benefits or not.  Getting unemployment benefits is not as good for self esteem as actually having a job.

I doubt that there are many people who are out of work who would rather stay on extended benefits rather than have a job. While the level of benefits varies by state, typically they are something like 60% of your pervious salary up to a maximum of about $400 per week. That difference should be plenty of incentive for people to want to go back to work (in addition to the psychological reasons).

However, with five people looking for every job opening (and not even counting potential skill mismatches — after all, a good carpenter is not going to make a good computer technician without a lot of retraining) extended benefits are more than a band-aid, but less than a cure (perhaps they most resemble those band-aids with the built-in antibiotics).

Where We Are/Where We’re Heading

So far, we have managed to stop the job losses in the country, which is a major achievement given the rate we were losing them a year ago. However, we have yet to really turn the corner and start to create new jobs. Even if the March jobs data, which is due out next week, is the start of a robust recovery in employment, it will take us a very long time to regain the 8.4 million jobs that have already been lost.

Think about it this way, under President Clinton the country experienced very strong job growth, totaling 23 million new jobs, but that was over 96 months — or an average of about 240,000 per month. If we were to return to that level of job growth starting with the March data, and staying at that level, it would take us almost 3 years — the spring of 2013 — to get back to the total level of jobs we had back in November of 2007.

While March is likely to be a very good month for job creation, especially relative to what we have been used to over the last few years, it is not likely to be sustained. There will be two special factors at work.

The first is a snap back from any jobs that were lost in February due to the snow storms, and the second is hiring the Federal Government for the Census. While having people work for the government on the Census is better on a number of levels than simply paying them extended unemployment benefits, those jobs will only last five or six months and are not a permanent solution.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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